Robert E. Moffit: My name is Bob Moffit. I am the director of Domestic Policy Studies at The Heritage Foundation. Welcome to our panel discussion on the impact of the Patients' Bill of Rights legislation, versions of which have just passed the Senate and the House.

I'm sorry to report that Professor Sara Rosenbaum of the George Washington University Medical Center, who is a prominent expert on health care law, will not be able to participate today. She had to comply with another obligation. I highly recommend Professor Rosenbaum's essay, "An Overview of Managed Care Liability," recently published by the American Association of Retired Persons (AARP). It is an excellent exposition of the status of health care law and the Patients' Bill of Rights.

Our first guest today is John S. Hoff, a Washington, D.C., attorney who has long specialized in health care law. ² Mr. Hoff is a graduate of Harvard University and Harvard Law School and once clerked for the Honorable Warren Burger. In addition to serving in private practice, John was a senior staffer with the National Bipartisan Commission on the Future of Medicare.

He has written extensively on health care policy and law and the Patients' Bill of Rights, including Heritage Foundation Backgrounder No. 1350, "The Patients' Bill of Rights: A Prescription for Massive Federal Health Regulation," published on February 29, 2000. He is also co-author--with Mark Pauly, Patricia Danzon, and Paul Feldstein--of a major health care reform plan entitled Responsible National Health Insurance , published in 1992 by the American Enterprise Institute.

Our second speaker is Robert Charrow. Bob Charrow is a partner at the Washington, D.C., law firm of Crowell & Moring, where he also specializes in health care law. He represents health care providers, doctors, hospitals and clinics, universities, research institutions, pharmaceutical companies, and various other entities that have business arising under Medicare and Medicaid.

Before joining Crowell & Moring, Bob served as the principal deputy general counsel at the U.S. Department of Health and Human Services (HHS). He supervised legal counsel for various agencies within the department, including the Health Care Financing Administration (HCFA). Before his government service, he was a law professor at the University of Cincinnati College of Law. He received his law degree from Stanford University and did his undergraduate work at Harvey Mudd College in California.

A Prescription for Expansive Federal Regulation

John S. Hoff: Lawyers dive too quickly into levels of legal detail that ordinary Americans often find silly. I am going to try to avoid those details and, instead, talk about the main features of the Patients' Bill of Rights.

The current debate over the Patients' Bill of Rights legislation reminds me of the debate over the Clinton health care bill, where the main argument was whether it was going to cover 98 percent of the population or 97.3 percent of the population. Today, the House and Senate debate over the Patients' Bill of Rights is whether you can sue for $1.5 million, or $500,000, or some other dollar amount.

The whole public focus is on the liability provisions of the Patients' Bill of Rights. There are several things wrong with this focus.

For one, the rhetoric being used to sell this bill is erroneous. It is based on the assumptions that you can't sue your HMO [health maintenance organization] and that the Patients' Bill of Rights is going to fix that. Representative John Dingell (D-MI), for example, declared that the only people in this country who can't be sued are the HMOs.

This kind of rhetoric is hyperbolic and misleading. To say that you cannot sue your HMO under present law is wrong. You can sue your HMO. Furthermore, the issue is not just about HMOs; it's also about employer-sponsored health plans. Anything that applies to HMOs under the current law also applies to the other plans.

What proponents of the bills really mean by the statement that "you can't sue your HMO" is that you cannot sue any health care plan you may have for coverage denials for an amount that is greater than the value of the treatment that was denied. You can sue your doctor for malpractice, and you can sue your HMO for malpractice. But the issue we are concerned with is denial of coverage, and that is the area in which the Employee Retirement Income Security Act (ERISA) currently restricts litigation.

If we are concerned about denial of coverage, and if we want people to be able to sue for more than is now permitted, we should be seeking to change the restrictions in ERISA. The House and Senate health care bills are turning contract actions, which are suits over what is covered under a health care plan, into tort cases, which have much more extended types of recovery--including non-economic loss, non-economic injury, and (in certain cases) punitive damages. This is done by letting state law apply under some of the bills and in some circumstances. Curiously, even where federal action would be created, they do not phrase issues of coverage in coverage terms.

Liability arises if a plan doesn't exercise "ordinary care" in making its decision. But what happens if it exercises more than ordinary care but a patient still disagrees with its decision? If the issue is one of coverage, it is easy to determine what a plan covers or does not cover through its contract with the insured. It may or may not, for example, cover orthodontics or plastic surgery.

The Medical Necessity Issue
But the thorny issue lies in the phrase "medical necessity." How is it determined whether or not a particular treatment is medically necessary?

The troublesome secret is that nobody really knows what medical necessity means. The phrase was introduced at a time when there were often no more than one or two medical procedures that could be done in a given situation. We're now in the cable TV era of health care with numerous options. Today, there are maybe five or ten different alternatives for treatment or diagnosis, and decisions have to be made regarding which should be used.

For example, when a patient has a headache, at what point does it justify an MRI [magnetic resonance image]? When do you opt for chemotherapy? Even if you assume that the studies and trials are valid, how do you determine what is medically necessary for a specific patient? If you know, for example, that a particular chemotherapy will extend life in 32 percent of the cases for six months, would it be medically necessary? If you're the patient, I think the answer is yes, but is that what we all mean by medical necessity?

The current health care bills leave the health plans open for suits--not only before the care is delivered, but also after a patient was injured or died. There is potential for "retroactive" law suits regarding whether or not a particular treatment was medically necessary.

In such cases, the issue is turned over to an independent review body and, eventually, to the courts. (That independent review body, by the way, will have been licensed and regulated by the U.S. Department of Labor, the U.S. Department of HHS, and state agencies.) However, not only is the matter turned over to a board of doctors, but also, in this process, any definition of medical necessity that the health plan may have given in its contract is nullified.

Medical necessity has conventionally been used as a fudge phrase that does not have a consistent meaning. These health care bills deny a health plan the opportunity to provide a definition. The bills say that the review agencies may "consider" but will not be bound by the definition of medical necessity that is written in the plan's agreement.

In essence, these bills transform contract issues of coverage into tort cases, as they rule out the efforts of a party to the contract to define what the insurance plan must cover. The case becomes a "retrospective tort" in which it is determined whether or not a patient, who is either sick or dead, should have had a certain treatment. The definition that is adopted for medical necessity will determine the amount of damages and punitive damages for which the health plan may be sued.

Vehicles for Ambitious Federal Regulation
These bills are even more systemically dangerous than the broad, and arbitrary, range of liability they allow for. They serve, in essence, as a Trojan horse for massive health care regulation by the federal government. They set up a new federal regulatory structure over health plans (all health plans, not just HMOs) as well as over the terms and conditions of health care delivery.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) was the first major federal regulation of private health insurance. That law regulated only access to insurance. But the current legislation would regulate how care is delivered.

The truly disturbing thing is that, in spite of its obtrusiveness, this crucial aspect of the legislation is not even a matter of broad controversy, and the newly prescribed federal regulatory regime itself even has bipartisan support. The situation is similar to that of the Health Planning Act in the 1970s when no one raised a warning flag regarding the effects and consequences of the scope of the legislation.

A Lawyer's Dream
Provisions prescribing regulation would have multiple effects. For example, the current legislation would regulate utilization review. "Utilization review" covers just about everything, including decisions on whether or not a particular treatment is covered, and it applies not only to HMOs, but to fee-for-service or indemnity plans as well.

Consider several of the provisions of the bill:

• "Every plan, HMO, or a fee for service, must conduct utilization review [which means turning claims down or accepting them] by using written criteria."

• "Such a program shall utilize written clinical review criteria, developed with input from a range of appropriate actively practicing health-care professionals."

• "Such criteria shall include written clinical review criteria that are based on valid clinical evidence where available, and are directed specifically at meeting the needs of at-risk populations and covered individuals with chronic conditions or severe illnesses, including gender-specific criteria and pediatric-specific criteria where available and appropriate."

All of this will be the subject of new federal regulation. This is going to require every plan to have written criteria specifying when you get an MRI for your headache--every plan, every headache. It's going to be an enormous task and, of course, will remove all flexibility from the delivery of medical services to the millions of Americans covered by the legislation.

It also regulates a number of other things such as access to emergency rooms and the information (many, many, many pages of information) that must be given to plan members. All of this applies to indemnity plans, and many of those plans will not be able to meet the regulations because they simply don't act in the way that the authors of these statutory requirements assume.

In addition, the legislation regulates physician compensation arrangements with the health plans, and it regulates access to specialists. And--this is my favorite provision--the legislation states that "A plan shall ensure that members receive timely access to specialists who are appropriate to the condition that they're faced with."

So the health care plans have to ensure that you get to a specialist on time. Suppose a doctor says, "Go see a specialist," but you forget to go. Is the plan in violation of this requirement? Suppose the specialist can only see you in two weeks or three weeks. Is the plan liable because you didn't get there on a timely basis? And by the way, was that specialist you went to see an "appropriate" specialist for your condition?

There is going to be a multitude of regulatory provisions, and the failure of a plan to meet any one of these regulatory requirements will be considered as a denial of a benefit claim. Therefore, all of the other provisions of the bill kick in and the plan can be sued for liability.

Consider, for example, a case involving a specialist that actually took place. A general practitioner found a growth between his patient's toes and said, "You should go see a specialist (a dermatologist or oncologist)" because he thinks it's cancerous. Suppose that his patient does not go to a specialist and that she eventually dies of cancer. Who should be sued? The general practitioner for not making the phone call to connect the patient with a specialist and--under the current legislation--the health plan?

A Platform for Federal Control
The other point I'd like to make about the proposed regulatory regime is that, regardless of a bill's specific language, it is creating a large regulatory structure that will be in place, a platform for even further federal regulation. I can assure you that, over time, with every bad idea that emerges, the regulatory authority will be expanded. Once you set up the mechanism, it's very easy to expand it.

The current focus on the liability provisions of the health bills underestimates the effect the bills will have in the real world. Proponents say, "There won't be many cases, so it's not going to cost that much," or "Look at what happened in Texas. There wasn't much litigation or high cost." First of all, the Texas bill was an entirely different type of legislation.

But more important, all these arguments totally miss the point. These health care bills fundamentally undercut the ability of health plans to say no regarding any treatment or diagnostic procedure. Plans are going to say yes much more frequently. They already are, under just the threat of this bill or the threat of competitive pressures. They will say yes much more when this bill is passed. This will have a significant impact, aggravating already rising health care costs.

Anticipating the number amount of litigation that would result from this legislation totally misses the point. There may not be that much litigation. Why? Because, again, plans will simply say yes.

A Tacit Policy Reversal
It was only a few years ago that plans were being begged by the federal government and a variety of health policy analysts to say no to people going to the doctor, or even to the emergency room, because health care costs were going up and because people were going to emergency rooms for inappropriate reasons. Now the federal government, based on recent congressional actions, has decided that the plans shouldn't say no.

When they don't say no, or when they say no much less frequently (and this includes both HMOs and fee-for-service plans), health care costs are going to go up because they will be turning down fewer claims. Ultimately, the costs of insurance are also going to go up because of the regulatory provisions. When costs go up, everybody pays more for insurance. When the costs of insurance go up, it's harder for people to buy insurance, and the number of people with insurance will decrease. No question about it.

In spite of its higher cost consequences, Congress may still want to push this legislation through to a presidential signature. If so, this should be stated clearly. We are taking a position to deliberately increase America's health care costs, but no one is talking about the consequences. In essence, Congress is simply going through this exercise to help people who already have insurance obtain a few extra benefits. This is being done to the detriment of the people who have no insurance, or who have trouble holding onto the insurance that they have.

If somebody came down from Mars, and he looked at our health policy and tried to discern some clarity in its direction, he would say we were crazy. And if he could see the amount of energy that is being focused in this legislation, his judgment would be confirmed.

A Prescription for Unintended Consequences

Robert Charrow: I would like to discuss that aspect of the health care bills that has no "there" there, and that's the liability aspect of both the House version and the Senate version. If for no other reason, this element is interesting because it demonstrates the politics of this debate.

Both health care bills are remarkably similar. They are similar in the regulations they create and in how they treat issues of liability. Both bills create a federal cause of action, and both bills lift what is now known as the ERISA preemption.

What do we mean by a federal cause of action? As you know, after the Constitution was ratified in 1789, if you wanted to sue somebody for violating a contract, you would go into court--normally a state court--and sue for breach of contract. Today, if the amount in controversy is more than $75,000 and you and the person you are suing reside in different states, you can take your case to a federal court.

That's the way it's been for quite some time, but the legislation that is being considered would change that significantly. It would transform what would normally have been a run-of-the-mill contract action between an individual and a company into, literally, a federal case.

If you disagree with a decision that your insurance company has made regarding contracted coverage, there would be a potential cause of action in federal court. The legislation designates such a decision as "non-medically reviewable," one that doesn't involve any medical discretion--for example, how much deductible is appropriate, what the appropriate co-pay under the policy is, or whether or not a spouse is covered. If the beneficiary disagrees with the decision that is made with regard to such issues, he has access to federal court.

Employer Liability
What about the employer? This is where there is, in theory, a difference between the House and the Senate versions of the legislation. While both versions give rise to this new federal cause of action, the Senate version provides "a limited-safe harbor for employers." An employer would face no liability if that employer was not involved directly in the decision-making process that led to the denial of coverage.

Note that the word I used is "liability." However, the resulting transaction costs that will ultimately lead to an increase in premiums have nothing to do with liability. They have to do with defense costs, and there's nothing that says the employer can't be sued. If in fact an insurance carrier is sued, it is likely that the employer is also going to be sued, since the plaintiff's lawyer who is bringing the suit does not initially know what role the employer played in the decision-making process.

Therefore, in spite of the provision that in theory exempts employers from liability, employers in fact will be party defendants, and suits will be brought against them with abandon. This will lead a lot of employers, especially smaller ones, to cease offering health benefit plans to their employees.

There has been a lot of discussion about the so-called cap on damages. The Senate permits recovery of compensatory damages and pain and suffering associated with a breach of contract. Of course, in the real world, there is no pain and suffering associated with a breach of contract. You're entitled to the value of contract, which would be the value of the plan and the amount that denied coverage costs you to recover from another source.

The Senate version, however, does impose a $5 million cap on punitive damages, which they refer to, I believe, as a "civil assessment." But there is open-ended liability with regard to what is called the "compensatory aspects" of the contract action, which is a tort action. The Senate's $5 million cap is on punitive damages, and there is an issue as to whether this will be constitutional. The House version caps total damages (pain and suffering and civil) under the contract action at $1.5 million.

So there is a House-Senate difference in the amount of the cap and in how the cap applies in contract actions. However, federal cause of action is the same in both the House and the Senate versions, with just a slight difference with respect to how employers are treated in the Senate version.

Both bills lift the ERISA preemption. This refers to the Employee Retirement Income Security Act of 1974. If you are an employee and your employer provides a health plan, and if your employer is not a state or a governmental entity, then ERISA, the federal law, governs. And under ERISA, you cannot sue the plan for a coverage decision beyond the coverage limits; that is, the value that's in dispute. If, for example, a $5,000 procedure is in dispute, you cannot sue for recovery beyond the $5,000. Lifting ERISA preemption provides a plaintiff with the opportunity to sue in tort over a coverage decision--one involving the issue of medical necessity.

This is a very shortsighted decision. As experience with Medicare shows, premium increases that resulted from malpractice costs represent a relatively small percentage of total health care outlay--between 1 percent and 5 percent, depending on what the specialty is. However, as John Hoff has pointed out, the practice of defensive medicine during the malpractice crisis of the 1970s and 1980s drove up utilization, and this drove up health care costs far more than the premium increases drove them up. We can anticipate now a similar scenario with regard to health insurance.

Dipping into Deep Pockets
There are certainly smarter ways of providing some sort of regulation than through this mammoth piece of legislation. The ultimate effect of this legislation can be demonstrated using the principles of the flow of water. As water flows downhill, liability flows to the deepest pocket. In some cases, that deep pocket will be the insurance company. In other cases, that deep pocket will be the very people who are promoting this legislation--the physicians.

Some states have a cap on how much a doctor can be sued for. Other states do not have caps or have very high caps. For example, in California, there is a $250,000 cap on what a doctor can be sued for. So in states such as California, the targets of the suits are going to be the insurance companies. Under the Senate version, there really is no cap on suits against insurance companies. Under the House version, there is a modest cap, but one that is still far higher than the cap on the doctors. Therefore, the targets of the suits in California will be the insurance companies.

The situation is different when we consider states such as New York where there are no meaningful caps on the amount a doctor can be sued for. In these states, it will be the insurance companies rather than the doctors that will enjoy the benefit of the cap. In those jurisdictions, the doctors will become the targets of interest, and they're the ones that are going to have to pay.

In the long run, of course, it really doesn't matter whether the doctor pays or whether the insurance company pays--because, in the long run, we all pay. Costs trickle down.

Are there better ways of solving the perceived problems? First of all, I want to say that I don't know of any problem documented in any hearing or anywhere else that justifies the proposed federal cause of action. I have never heard anyone say, "I've had serious problems dealing with whether or not orthodontics is covered by my insurance policy." Even when such problems arise--and certainly they do at the ERISA level, because ERISA itself is so complex--they could be handled by providing a dual system of insurance.

Beneficiaries who want to have the ability to sue their insurance companies could be covered with a higher premium. Beneficiaries who are happy to live under the current system could continue to pay the current lower premium. The beneficiaries could decide for themselves. That's true patient choice, and that, to me, is more valuable than the broad scope of litigation provided by this piece of legislation.

Q & A

Dr. Moffit: Before we begin to take questions from the floor, I would like to use the chairman's privilege and ask the first question, because this is the first time I've ever heard this point raised in this particular health care debate.

It was said that the members of the medical profession could, under this managed care legislation, be liable through this new avenue for lawsuits. That's clearly not the point or the intention of the legislation. I don't think the American Medical Association acknowledges that, and I don't think many members of the medical profession supporting this legislation have encountered, at least to my knowledge, what you have just told us.

So my question to Counselor Charrow is this: Have you had any communication with representatives of the medical profession on this particular issue?

Mr. Charrow: No, I haven't, but look at the very first case involving what I would call HMO liability, which was a Medicaid case in California, Wickline v. State (1986). In that case, the court said essentially, "You know, when all is said and done, it's really the bloody doctor's fault in this case. He's the one that should have been sued."

So the handwriting has been on the wall. If you look at ERISA suits, where the plaintiff tries to bring his case into court in spite of the ERISA preemption, the HMO certainly is sued, but also the physician is sued; the hospital is sued; the entire chart is sued. You sue the chart. Any name that appears on that chart becomes a party defendant, irrespective of the role they played. You sue first and sort it out later.

If physicians think that they are getting a free pass with this legislation, they are sadly mistaken. Quite the opposite is likely to be the case.

Dr. Moffit: Perhaps we've just had our very first lesson in the unintended consequences of the Patients' Bill of Rights.

Question: I'm from the Association of American Physicians and Surgeons (AAPS). I do need to correct the record on the position of medical professionals.

AAPS has been against this legislation. We have pointed this out repeatedly to the AMA, and they ignore it. Even their own polling shows that 74 percent of the members of the AMA oppose allowing expanding the ability of beneficiaries to sue their plans, particularly if it's not meshed with some other tort reform or the malpractice issue. Lawyers just love to set warring parties against each other. But we've been saying that the physicians will be sued in addition to the plans.

I'm very intrigued by the dual premium system. Is that a new proposal? And what would be the barriers to that?

Mr. Charrow: I am a strong proponent of choice, and when you stop and think about what it is we want to give to a patient, it is essentially the ability to choose, whether it's a form of treatment or the form of coverage.

As an ex-torts professor, I think that you should be able to select your option. Ironically, as the Supreme Court and Congress are moving the business community toward forced arbitration, Congress seems to be, at the same time, moving in the opposite direction in terms of medical care--pushing everyone into the courts.

Mr. Hoff: This legislation was pushed by doctors who feel that they're already being subject to these lawsuits. I think the sentiment that is driving their support for this legislation is simply, "If it's bad enough for me, it ought to be bad enough for the HMO." They're saying, "Look, we're already in such bad shape. We want other people in this boat." This is not a thorough analysis, but I think that's part of the psychology behind their stance on this legislation.

Regarding the choice option, Representative Jim DeMint of South Carolina has proposed legislation that would provide a choice of whether or not to fall under these liability provisions. But who is going to make that choice--the employer or the employee? Moreover, as it's now structured, the employer seems to get the savings of the employee's decision, so how do you bring savings to the employee who makes the choice? And can an individual employee make the choice, or does it have to be made by consensus of the whole group?

Beyond these questions, if you gave individuals a choice regarding liability, you would have to let them out of the regulatory provisions as well.

Mr. Charrow: It doesn't matter who bears the costs initially. The patient, as the consumer, is going to bear them anyway. This whole sideshow of whether or not the employer is going to be liable or whether or not he's going to be sued doesn't matter, because even if the employer doesn't get sued or doesn't have to pay any liability, he's going to pay through premiums.

There is a difference between the status quo and the way in which doctors can be sued under this legislation. The big difference is that many states permit what are called "Mary Carter" agreements.

Let's say, for example, that a doctor and an insurance company are being sued, or a doctor and a pharmaceutical company are sued together, which is frequently the case when a medical product causes damage. The plaintiff's lawyer will go to the doctor and say, "Look, you're the family physician. The pharmaceutical company has the deep pocket. Why don't you testify on our behalf at trial, even though you're a defendant? Then we won't take anything from you if we get a judgment." This is the essence of a Mary Carter agreement.

So we can have a situation in which a fellow defendant is testifying on the plaintiff's behalf at trial. The doctor has a real incentive to do that because, in many jurisdictions, he can be let off the hook.

But consider what happens when the caps are in place with regard to the insurance companies. Then the doctor will be the one with the deep pocket, and the Mary Carter agreements will disappear. The doctors are going to find that they are really the ones who are at risk because they no longer have this protection. There are some bizarre features in this legislation and some truly unintended consequences.

Question: I expected a little more objective discussion than we have had here. This debate is about a patient's right to health care. It's a consumer issue. Patients pay the premiums, and they deserve care. That is a fundamental marketplace idea: When you pay for a service, you get service.

The Patients' Bill of Rights legislation allows patients to take action and get redress. The two-tiered scheme you offered is an immature idea. It allows the wealthy to have a court remedy for bad actors, but it denies the same rights to accountability to the impoverished or to those who can't afford the higher premium. I don't think that's fair.

Mr. Hoff: Let's assume for a moment that HMOs were in fact bad actors and that we thought it appropriate to regulate their behavior by imposing a titanic regulatory regime, tort liability, and a federal cause of action. Let's assume that this were the case. There is no evidence that fee-for-service plans have engaged in comparable behavior.

A recent Academy Award-winning movie, As Good As It Gets, elicited applause from the audience when an HMO was rhetorically savaged. I don't think the reaction would be the same for a fee-for-service plan. Yet, if this legislation passes, the fee-for-service plan is sunk, along with the HMO, in its regulatory mire. There is no evidence that it deserves similar treatment.

Question: Where in the legislation does it say the regulations would apply to fee-for-service plans? On the House side, cases of care that has already been delivered are removed from liability, and that is my definition of "fee for service."

Mr. Hoff: That's also an HMO. Let's move from the House bill until we see what it says in writing and consider the Senate bill, which applies to fee-for-service indemnity plans, as well as HMOs, with the exception of four or five sections of the regulatory provisions. All of the liability sections of the Senate bill would apply to fee-for-service plans.

Question: Bob Charrow, you mentioned alternatives, and John Hoff did some work to explain why Congress excluded Medicare and Medicaid from the terms of the bill. Can you comment more on that? If there's a better plan, why aren't they discussing it?

Mr. Charrow: We have to distinguish the liability issues on the one hand and the regulatory regime on the other. Both of us agree that liability issues represent a very small percentage of the bill, yet they have drawn attention and controversy away from the regulatory regime.

The regulatory regime is going to be quite costly. Obviously, one of the things that the Senate version does is to flip a normal presumption. When you go to a treating physician today under Medicare and that physician says, "You need treatment A," that treating physician's opinion is entitled to absolutely no deference.

This bill would flip that presumption. It would drive up Medicare premiums dramatically. There was a proposal in one of the earlier versions of the bill in the prior Congress that would have included Medicare and the federal employees under the terms of the bill. A fair number of officials from the federal employee organizations and the Medicare program went over there to Capitol Hill to try to dissuade them from putting Medicare or the Federal Employees Health Benefits Program (FEHBP) under the provisions of the legislation.

Question: What of alternatives?

Mr. Charrow: I proposed a dual system, but my basic feeling is that any piece of legislation that's this complex is not a well-thought-out piece of legislation.

Mr. Hoff: The alternative to this whole thing is a change in the structure of the health care market. Currently, people don't have ownership or control of their own insurance. They feel that the employer is choosing the insurance for them, and they're getting these lousy HMOs. Furthermore, they don't get the benefit of the savings, which they think their employer realizes by opting for so-called cheap or less expensive plans.

If people were buying their own insurance and looking at their own premiums, a lot of these provisions in these bills would be unnecessary. Nobody is going to join a plan that says you can't go to the emergency room unless you've gone to some "gatekeeper." That kind of idea just wouldn't sell in a real market. You don't have to regulate against it.

With regard to Medicare, the reason it wasn't put in was because the Members of Congress didn't want to bear the costs. They didn't want to confront the employee or the taxpayer with the costs that would be incurred if this legislation were to be imposed on Medicare or other government programs.

Another, more practical reason was that they didn't want to have to run the legislation past several more committees. As soon as they put the FEHBP in the Senate bill, the federal employees labor unions squawked about how much money it was going to cost. Bob Moffit followed this closely and could tell you more about it.

Dr. Moffit: If you go back to the early 1990s and you look into the fine print of a lot of your major congressional health care reform proposals, you will often find very subtle provisions which say that, in effect, whatever the health care reform proposal is, it will not apply to persons covered under the provisions of Chapter 89 of Title V; that is, Members of Congress or other persons enrolled in the Federal Employees Health Benefits Program.

There's a reason for that. As Senator Edward M. Kennedy (D-MA) said when Senator Don Nickles (R-OK) offered his amendment to the Senate version of the bill to include federal employees and other government programs, federal employees don't need the bill's grievance procedure. Federal employees don't have to go to court. Federal employees don't have to hire lawyers. If federal employees have a problem with their health care plans, they just fire them. Senator Kennedy nonetheless accepted the amendment and asked for a non-recorded vote, and the Senate accepted the amendment--with heartburn, I am sure.

The federal employees historically have had an insulated system. It's the only system in which people can actually pick and choose from a broad range of private plans and enjoy such a wide variety of personal choices. They understandably do not want the conventional restrictions of conventional employment-based insurance or the regulatory overkill that characterizes conventional government health care programs.

Question: How is the Patients' Bill of Rights constitutional? Where does this idea come from that you have a right to medical care? Can any of the panelists name any federal intervention in the health care market since World War II that has not had unintended consequences?

Mr. Hoff: The Commerce Clause, Article I, Section 8 of the Constitution, provides Congress with the authority to regulate commerce among the states, but the question arises: What happens when we are dealing with matters that are purely intrastate? That is being tested now in two courts with respect to the Health Insurance Portability and Accountability Act of 1996, particularly the privacy provisions.

The 1996 statute itself dealt only with electronic transmitted data, in theory--data in the channels of interstate commerce--and that's, of course, subject to the Commerce Clause. But the provisions deal with paper records held in a doctor's office, and that is purely intrastate.

I think the 1996 provisions will fall on Commerce Clause grounds. There are also Fourth Amendment issues. I think most of the actors who would be subject to a Patients' Bill of Rights are interstate players.

Question: You posed the question earlier on in your remarks: At what point in time does a headache require an MRI? Who should decide ultimately if a headache requires an MRI?

Mr. Hoff: You want me to say the doctor.

Question: No, I actually do not. I just want to know your answer.

Mr. Hoff: The doctor should decide. The problem is that we're dealing with other people's money. Are we in a position to let the doctor and the patient use other people's money the way they see fit? That's an important question that this legislation doesn't consider. We are disguising the issue rather than debating it.

Question: But I want to understand your philosophical opposition to the underlying principle of the entire bill. Prior to the emergence of a more utilization-based model, if a doctor, a treating physician, decided that these headaches warrant an MRI, that would have been the end of the conversation. If the doctor said the MRI was required, then the MRI was performed.

Mr. Hoff: We were existing in a different world 30 or 35 years ago. Costs were less, and there were fewer options.

Question: Understood. Then, under a utilization review-based model, the doctor makes the treatment recommendation, and the plan makes the decision as to whether or not to cover that--even though it is clearly an available benefit.

What the bills both attempt to do is take that ultimate decision-making authority from the hands of the treating physician and from the hands of the insurer and give it to a neutral third party. I'm trying to understand how you philosophically disagree with that. What is your difficulty?

Mr. Hoff: My difficulty is that what you call the independent, objective third party is dealing with other people's money. When an insurer sets a price for a policy and the patient or the employer pays it, why should somebody else come along and change the expectations that underlie that price?

The problem we have in the current system is that those expectations are not articulated. They've been subsumed under the term "medical necessity." I am not defending the phrase "medical necessity," but I am saying that this legislation would abort all efforts to differentiate by saying that anything that a plan and the member agreed upon is irrelevant in determining medical necessity.

We'd be better off if patients paid for their own care and could make their own decisions with their doctors, and insurance would kick in at much higher levels where there would be fewer of these discussions. But so long as we have third-party payment, we have this problem.

We have a double moral hazard with third-party payment: We have insurance paid for by the employer, and we have it subsidized by the government at close to 50 percent. At some point, somebody is going to have to say no, or the costs are going to go up so high that nobody could get insurance. That is a fact. How we get out of that situation is a different question.

Question: Managed care companies provide experts that help develop group practices, which is where treatment is sometimes denied. You're claiming that those things are no longer going to be denied and that, because care would no longer be denied, premiums would go up.

What about the other side of that? Do you think insurers are going to start writing contracts more strictly and that they will stop offering some types of care under any circumstances just to avoid the issue of medical necessity?

Mr. Hoff: That's exactly the question that should be asked. I can't wait to see how such policies would be written, because they're not going to say, "We do not offer MRIs; we do not cover MRI services." It would be very hard to get around that kind of exclusion.

But suppose they say, "We only provide MRI services when you have had a headache of more than X degrees of severity for more than two months" and then go on to specify the circumstances for every service? We're all going to go bananas, although that level of specificity is one way out of this.

However, as I said earlier, I don't think the insurance companies are going to bother, and the employers aren't going to bother. They're more likely to start negotiating with plans as to whether MRIs should be given after six days or 12 days. I don't think the insurers are going to want to make the effort. They're more likely just to say yes, which would then result in higher premiums that would force more employers to run.

Question: Where do you think the liability will be when a doctor fails to mention a test that might be available because he knows it would not be covered by his patient's insurance? Several cases such as this have already been decided and have ruled that the insurer was vicariously liable when a doctor has said, "Your insurance isn't going to cover that test," and didn't give the test, and the patient's cancer was not detected.

Will the insurer be held vicariously liable if the doctor did not go through all the possible steps of a review process? Is the insurer going to be held liable if a doctor says, "Your insurance plan won't cover that, so let's not do it"? In such cases, the insurer now hasn't given its beneficiary a written denial and the opportunity for an external appeal and all those other requirements that are written out in the liability sections.

Mr. Hoff: You're positing vicarious liability. We hold them liable now where there's vicarious liability. This would not be the case in fee-for-service, but it is sometimes the case in HMOs, whether they're employees or whether they're a parent agent. You're saying, in the absence of vicarious liability, would the insurer be liable?

Question: No, due to it.

Mr. Hoff: Due to it, it would be, but only in those circumstances.

Question: I'd like to address the so-called employer exemption, which is in both bills with regard to the designated decision-maker. It's widely accepted that this could protect the employer. That seems to me the general feeling of those who were voting on the bills.

My question is this: Both bills require the designated decision-maker to have professional liability insurance. Yet approximately 20 of the states--the more populous ones, including New York, Texas, and California--have specific laws that do not permit these kinds of punitive damages to be insured. So this provision is a loser and unworkable with that barrier.

Do you think it would be constitutionally proper for this federal legislation, if it passes, to require that insurance companies make punitive insurance available? Though approximately 20 states do not allow this, isn't it necessary, if the exemption is going to work, to allow the designated decision-maker to insure against punitive damages?

Mr. Hoff: You've just expressed one of the thousands of issues that are going to emerge with this legislation, and you make a very good point. I've never understood this designated decision-maker issue because, in truth, it doesn't matter who the designated decision-maker is. The cost is going to be borne by the same people anyway.

Mr. Charrow: The more you consider this legislation, the more problems emerge. Once one of these versions of the bill, or some combination of them, goes into effect, there's going to be a lot of soul-searching, and there's going to be a lot of litigation because many unforeseen problems will emerge.

Dr. Moffit: I must comment. Under the English common law, the agent reports to a principal. The agent acts on behalf of that principal. It is basic to the law of contracts. There is no such thing as an independent agent floating out there, making decisions by himself without a principal. If you have an agent, then you have a principal. Analogously, if you have an effect, you have a cause.

By creating an independent designated decision-maker, do you actually break that relationship between the agent and the principal and erect some impregnable wall to protect the employer? Not likely. An independent agent has the ontological status of a square circle. Just as it is logically untenable to have an effect without a cause, it is also logically untenable to have an agent without a principal.

This is a logical, not a legal, argument. Neither of these gentlemen of the bar would even go near resolving a metaphysical problem and collect a fee for it. But the basic proposition--that employers are ultimately insecure--is nonetheless true.

Question: What is your position on the ERISA preemption itself?

Mr. Hoff: My suggested alternative would be to make the ERISA preemption moot by letting people buy their own insurance, and I would let them be subject to state law.

Mr. Charrow: ERISA preemption has been a highly unworkable provision of federal law. If you look at federal appeals courts' decisions, it's very difficult to find a consistent thread of reasoning. It's very difficult to read a Supreme Court decision and find a reasoned thread. The very fact that the Court has taken up over 15 ERISA preemption cases since 1974 indicates that it's a troubled statute.

The real issue is not the ERISA preemption; the question is whether or not, of the versions of the Patients' Bill of Rights floating around, any one is more workable than ERISA preemption. I think not. I think we're making a greater mistake by adopting one of these proposals in the long run.

Just look at Section 1801 of Medicare. Section 1801 is the provision of Medicare that the AMA was largely responsible for in 1965. It says essentially that nothing in this title, the Medicare Act, shall be construed as providing the government the authority to regulate the practice of medicine, but the reality is very different from the seemingly straightforward language of Section 1801.

Question: Do you think that the House took us a small step toward getting to where you would like to go in terms of putting consumers back in charge of health care by expanding the medical savings accounts? It does give some added ability of individuals to control their own health care and not rely so heavily on insurance companies and HMOs.

Mr. Hoff: The answer is clearly yes, but I don't think it makes the legislation worth it. You ought to be able to do that as a freestanding measure.

Endnotes